ip valuation cle september 2011
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© CONSOR 2011
IP Valuation September, 2011
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CONSOR Intellectual Asset Management
© CONSOR 2011
Why IP Valuation?
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Beyond specialized IP law practices,
business, commercial, tax and estate practitioners
Increasingly involved in identifying, protecting, applying, and defending intangible assets owned by clients.
• Value to whom?
• How much value?
• How and when does value change?
• Buy, sell or transfer
• Disputed ownership
• Improve performance
• Collateralization
Context Purpose
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What is IP?
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Intellectual Property vs. Intangible Assets
Bundles of IP and IA Assets
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Context: Property Types
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IA vs. IP: Commercialized Separate from Other Assets
Internet Assets
Data Bases
Intellectual Properties
Intangible Assets
Customer & Vendor
RelationshipsPatents
Copyrights
Trademarks
Trade Secrets
Proprietary Systems
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IP Property Types
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Bundles of Intangible Assets (IA), each contains Intellectual Properties (IP)
Marketing Relationship (Customer / Supplier)
Technology Contract
Marks, brands, names, domains
Trade-dress, packaging, logos
Non-competes, key-person
Customer / Supplier relationships
Distribution networks
Order backlog
Technologies, know-how, systems, methods
Patents, software, recipes, content, databases
License / royalty, lease, franchise
Permits, use rights, broadcast rights
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Valuation Methodologies
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Economic principal of substitution
Measures expense required to replace
Neglects future benefit
Present value of future economic benefit
Requires projections and a risk assessment
Requires allocation of benefit specific to the
asset
Value based on price of similar assets
Requires suitable comparable assets
Des
crip
tio
n
Replication / replacement feasible
Benchmarking
DCF
Relief from Royalty
Comparable transactions
Benchmarking
Ap
plic
atio
n
Valuation as Art and Science
Cost Income Market
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Valuation Tools of the Trade
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Discounted Cash Flow Models
Comparable Valuation Ratios
Replacement Cost
Relief from Royalty
Allocation / Excess Earnings
Option Models
Proprietary Approaches
The “Science” of Valuation
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Changing Valuation Terminology
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MVIC
= Assets + Liabilities
MVE
= Equity Ownership Minority
Interests
Level of Value Value Definitions
Fair Market Value
Fair Value
Strategic Value
Liquidation Value
Defining the Assignment to Avoid “Bad Art”
Who’s Setting Standards?
AICPA, ASA, ISO, NACVA, IRS, Courts, FASB, LESI, and more
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Case: Improper Use of a Character
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Background
• Defendants used a character to promote products outside of the permitted terms of agreement with IP owner
• Financial data from the defendants unavailable
• Multiple methodologies applied
• Income approach calculation yields different value than market and cost approaches
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Methodology Approach
Defendant's Annual Advertising Budget Cost 875 925
Comparable Endorsements Market 50 90
Comparable Sponsorship Fees Market 25 85
Reasonable Royalty Income 1,100 1,200
Results ($millions)Methodology Approach
Defendant's Annual Advertising Budget Cost 875 925
Comparable Endorsements Market 50 90
Comparable Sponsorship Fees Market 25 85
Reasonable Royalty Income 1,100 1,200
Results ($millions)
Case: Improper Use of a Character
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Case Take-away: Context is Key
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A more complex case showing
the importance of Context, and
the importance of identifying IP
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Case: Identifying IP
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• Client assists municipal agencies issue bonds for public interest projects (a Public Private Partnership)
• Client has achieved substantial profits for several years
• Key competitor is a state-run agency
• State accuses client of gouging the parties it serves
• Has Client developed IP that justifies the excess profits?
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Case: Identifying IP
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Can see its there . . .
Net Revenue
Comps Average Subject
Earnings Margin 10% 25%Operating Income 2,000,000 5,000,000Market Earnings Multiple Comp. public
financial companies6.0x 6.0x
Implied MVIC 12,000,000 30,000,000
Value of Tangible Assets Book value per Balance Sheet
(500,000) (500,000)
Value of Goodwill 11,500,000 29,500,000
Subject's Excess EarningsSubject's Proprietary Intangible Assets
20,000,000
3,000,00018,000,000
© CONSOR 2011
Case: Identifying IP
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• We can see IP exists . . . • What are the key types
of IP Assets?
Case Take-away: Both IP and IA Contribute to Value
Proprietary systems (some could be commercialized)
Proprietary methodsRelationships / key people
(can’t be commercialized)
History / Longevity / 1st to Market (can’t be commercialized)
IA at the CLIENT
© CONSOR 2011
Value Constraints
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Present Value of Expected Future
Benefit
Val
ue
of
Bu
sin
ess
=
Tangible Assets
Intangible Assets
= =
Tangible Assets
Intangible Assets
Brand / Trade Names
Intellectual Properties
Could a company’s IP assets exceed the market value of the business?
• Context: Fair Market Value (transaction did occur)• Context Implication: Value driven by expected future benefits
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Case: Impact of Context
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• Frequent Context for IP Valuation: Purchase Price Allocation (FAS 141/142)
• Purchase Price Creates Goodwill• What Portion of the Acquired Goodwill should be allocated to IP?• What are the components of the IP Allocation?
Could a company’s IP assets exceed the market value of the business?
Sources of Funds Use of Funds AllocationCash 50 Buy Equity 400 A/R 25Stock 275 Repay Debt 100 Inventory 50New Debt 200 Costs 25 PP&E 100
Goodwill 350
Total 525 Total 525 Total 525
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Can Value of IP > MVIC?
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Tools / Science• Forecast cash flows by product• Quantify the interaction of IP Assets and
their contribution to earnings
Context Drives the Science• Value of IP cannot
exceed MVIC in a purchase price allocation
• Value of each IP = PV of future benefit each IP provides to Company’s cash flow
Case Take-away:
Context is key / Context Can Be Forced on the Value Analyst
Allocation Goodwill AcquiredA/R 25 Brands 150Inventory 50 Patents 65PP&E 100 Databases 115
Goodwill 350 Other IA 20
Total 525 Total 350
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What if the Context Changes?
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Frequent Contexts• Infringement Damages• Licensing / Endorsement
Damage Calculations: require application of traditional valuation methodologies to determine value of economic benefits lost, or not achieved (often when an arm’s length transaction would never have occurred)
Licensing: requires both parties understand and estimate the present value of future economic commitments (without the benefit of an existing arms-length transaction)
What if we don’t have a completed transaction between a wiling buyer and a willing seller?
© CONSOR 2011
What if the Context Changes?
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IP Valuation Methodologies• Comparable Transactions• Relief from Royalty• Discount Future Benefit• Replacement Cost
What if we don’t have a completed transaction between a wiling buyer and a willing seller?
All these approaches construct a
hypothetical agreement between IP Owner and IP User
Crafting the Hypothetical Agreement Requires Art and Science
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Hypothetical Agreements
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• Uniloc USA v. Microsoft Corp: applicable specifically to IP analysis
• End of the 25% rule = “End of the unsupported conclusion”
• Averages & Surveys as the lemming’s rule of thumb
• If it’s a universal norm, it can’t meet the criteria for comparables
This Shouldn’t be Shocking
No More Rules of Thumb
• Licensing agreement = contractual financial agreement
• Commitments can and do take many forms
• Hypothetical agreements must reflect their real-world counterparts
Replacing Rules of Thumb
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Reflecting Real-world Complexity?
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Did Consider . . . • Forecast benefit (sales, term)• Industry dynamics (rate)• Risk assessment
A Typical Relief From Royalty Calculation
Annual Sales of Brand X 100,000$ Industry Average Royalty Rate 8.0%Estimated Annual Royalty Income 8,000 Term (years) 10 Annual Discount Rate 15.0%Total Value / Damages 40,150$
Assumed . . . • Constant sales• Industry average royalty rate • No changes during term
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Case: Alternative Royalty Rate Analyses
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• Value of trademark and related brand assets to a partner business?
• Method Applied: PV of license-derived economic benefits
• Subject IP did not resemble comparable IP transactions• Parties had a standing relationship
Ranges observed in Comparable Transactions
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Case: Alternative Royalty Rate Analyses
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Surveys and Comparable Transactions are not The Only Tools Available
Royalty Rate Build-up Method: BVEq
CBV Core Brand Value 1.0 2.0
IVE 1 Sub-brands 0.0 0.0
IVE 2 Global Brand Marketing 0.1 0.1
IVE 3 Incremental Sales for Licensee 0.1 0.1
IVE 4 New Product Development 0.2 0.3
IVE 5 Other Brand Assets 0.1 0.3
Total 1.5 2.8
Range (%)Brand Value Components
BVEQ= CBV + (IVE1 + IVE2 + …. + IVEN)
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Period 0 1 2 3 4 5
Licensee Sales 1,024 1,229 1,290 1,322 1,356
Annual Royalty Rate 8.0% 5.0% 5.0% 3.0% 3.0%
Licensee BenefitsUp-front Payment (50)
Additional Margin 52 179 205 210 215
Annual Fee (5) (5) (5) (5) (5)
% of Sales Royalty (82) (61) (65) (40) (41)
Total Benefits (50) (35) 112 135 165 169
Present Value @ 16% (50) (30) 83 86 91 81
Value of IP to Licensee 261
Licensor BenefitsUp-front Payment 50
Promotions Commitment (10) (10) (5)
Annual Fee 5 5 5 5 5
% of Sales Royalty 82 61 65 40 41
Total Benefits 50 77 56 65 45 46
Present Value @ 13% 50 68 44 45 27 25
Value of IP to Licensor 259
Case: Reflecting Reality
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Take-away: “Hypothetical Negotiation” Drives Greater Analytical Burden
© CONSOR 2011
When Valuation Issues Arise?
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Question Answers
Why is valuation needed? Transaction, Infringement, Financial Reporting, Tax/Transfer, etc.
What level of value? MVIC, MVE, Minority Interest
Who will use the value result? Accountants, IRS, Potential partners or investors, Management, other
What information is available? Audited financials, business plans, industry studies, etc.
What types of assets exist? Tangibles, know-how, brands, patents, designs, relationships, etc.
© CONSOR 2011
The Valuation Answer
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Reconcile results from multiple approaches
Reconcile the calculations to the context
There Are No Valuation Answers: Only Good Choices
Context + Time = Value
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HandoutsLaw 360 on Rules of Thumb
Considerations for Hypothetical Negotiations20 Licensing Structure Alternatives
Criteria for Comparable Transactions
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Discussion
© CONSOR 2011
CONSOR’s Services
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www.consor.com
• Valuing patents, trademarks, copyrights, trade secrets, celebrity rights, and technology
• Helping businesses understand the value of their IP
• Valuation for transactions, tax purposes, litigation, licensing deals, and more
IP Valuation
858 454 9091
• Assisting attorneys with damage calculation parameters & case strategy
• Proven success as expert witnesses
• Economic damages in litigation
• Federal, state & international experience
• Arbitration, and mediation
IP Litigation Support
• Assisting clients in maximizing the licensing value of their IP assets
• Develop licensing strategies, execute, negotiate license agreements
• Licensing experts in litigation
• Evaluate financial and economic commitments of a potential transaction
Licensing Consulting• Maximize the value of bankrupt assets
• Identify valuable IP in bankruptcy
• Market and sale of bankrupt IP assets
• Value and dispose of intellectual property
IP Transactions